6 Money Myths That Can Hurt Your Finances
Money myths abound. Some are innocuous; others, not so much. Here are six common money myths that can hurt your financial well-being, plus what you can do instead.
1. “I Should Take My Social Security Benefits at Age 62”
Under most circumstances, the earliest you can receive Social Security benefits is at 62. But that doesn’t mean you should take them then. Nor does it mean you shouldn’t. What’s important is to complete an objective analysis of your personal situation.
You may want to postpone benefits until your full retirement age or even up to age 70 to increase your monthly benefit amount. However, if you retire early, you may find it beneficial to use the money from Social Security rather than draw down your retirement accounts. Doing so allows those accounts to grow, and you won’t have to pay taxes on the withdrawals.
The best way to determine the age to sign up for Social Security is to look at your situation, including your desired retirement lifestyle, amount of retirement savings, income sources, physical health, and expected longevity.
Speaking of Social Security …
2. “I’ll Be Able to Live Off My Social Security Benefits”
Many people tell themselves this myth because they’re worried that they haven’t saved enough for retirement. But the fact is Social Security was not designed to create a comfortable lifestyle in retirement. As MSN reports, Social Security will equal about 40% of your wages. So your benefit amount likely will not be enough without scrimping to get by.
It’s critical to save for retirement while you are working. You likely have a variety of tools at your fingertips, such as a 401(k) or IRA (both traditional and Roth versions), a health savings account (HSA), brokerage account, and even a regular bank account for your emergency fund (three to six months’ worth of expenses).
The earlier you start saving for retirement, the better. But even if you start late, you can make up for lost time through such strategies as catch-up contributions, which allow you to save more in your tax-advantaged retirement accounts.
The goal is to have enough money saved that Social Security supplements your retirement income, not serve as the only source.
3. “It’s OK for My Partner to Handle All the Finances”
In many relationships, one partner tends to manage the finances more than the other, and that’s fine. However, the problem arises if the spouse who manages the money becomes incapacitated or dies. The other spouse may be left scrambling to understand the finances at a time of stress and grief.
It’s important that both partners be involved with the household finances. Both should know the location of important documents and how to access all financial accounts. It can also be helpful to schedule regular “dates” where you discuss your current finances and direction.
That way, in a crisis, both of you will be prepared to handle it.
4. “I Can Predict a Stock’s Growth Potential Based on Its Performance”
This money myth trips up many investors. It can be so detrimental that you often see the following words on market commentaries: Past performance is no guarantee of future results.
Think about it this way: The stock market can—and does—change regularly and rapidly. A valuation can get overinflated, and the market will correct it via a lower stock price. A pandemic will begin and cause the market to drop. A bear market starts, or perhaps a recession. And today’s winning stock is tomorrow’s loser.
Rather than trying to predict stock performance, we suggest owning a broadly diversified investment portfolio, such as an index or mutual fund. By holding a broad mix of investments, you don’t have to worry about individual stock performance.
5. “I Go with My Gut Instincts When Buying and Selling Stocks”
In our experience, a “gut instinct” is really a decision driven by fear or greed. Such emotionally based decisions can wreak havoc on your finances. For example, if the stock market starts dropping and you panic, you will lose money by selling. You’ll also be on the sidelines when the markets begin climbing once again.
Our fiduciary retirement planning firm believes that a better approach is to create a long-term investment strategy based on your risk tolerance and return needs. When markets go up or down, you have an objectively based plan to stick to so that you don’t give in to fear or greed.
You can also work with a financial advisor who helps you keep a level head in times of volatility. By keeping your sights set on your long-term goals, you’ll be less swayed by short-term market moves—which is a much better approach to investing than “gut instincts.”
6. “I’ll Worry About Long-Term Care When I Need It”
Insurance can be pricey, so many people take a “wait and see” approach to long-term care. The problem is, long-term care is expensive too, and extended care can drain your bank accounts quickly.
Medicare will not pay for long-term care, and you will have to become insolvent to use Medicaid. It’s important to plan for the possibility of long-term care since there is a good chance you will need it at some point.
You may be able to self-fund the expense, or you may opt for a long-term care insurance policy. The crucial part is to have a plan. Consider talking with a fee-only financial advisor to determine the optimal choice based on your financial situation.
Summary
These six money myths can hurt your personal finances. But we’ve also given alternatives to the myths that you can begin adopting today. With regular savings for retirement, communication with your partner, assessment of Social Security, and a long-term investment strategy and diversified portfolio, you help set yourself up for financial well-being.
Schedule a complimentary 15-minute call to discuss your financial situation and how we may be able to help.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice. This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.